Federal civilian and military employees participate in retirement systems that are structurally different from private sector 401(k)-based plans. The Federal Employees Retirement System provides a defined benefit pension, Social Security participation, and the Thrift Savings Plan, a government-administered defined contribution account. Military personnel have their own retirement structures, including a traditional legacy system, the Blended Retirement System for newer service members, and a range of benefits available through the Department of Veterans Affairs.
The complexity of these systems, combined with frequent misunderstandings about how the various components interact, means that many federal and military retirees leave significant benefits on the table or make suboptimal decisions about when and how to claim what they've earned. Understanding the specific rules that govern FERS pensions, TSP withdrawals, military retirement pay, and VA benefits is essential for anyone in or approaching retirement from federal service.
Eastern Idaho has a meaningful population of federal employees, including those who work for federal agencies with a presence in the region, veterans, and National Guard members whose careers have produced federal retirement benefits. This paper addresses the planning considerations specific to this population.
FERS is a three-part retirement system for most federal civilian employees hired after 1983. The three components are the FERS Basic Benefit, a defined benefit pension calculated from years of service and the high-three average salary; Social Security, for which FERS employees contribute and from which they receive standard retirement benefits; and the Thrift Savings Plan, a defined contribution savings account similar to a 401(k) with government matching contributions.
The interaction among these three components creates a retirement income stream that is more complex than either a pure pension or a pure 401(k) system. A federal employee nearing retirement needs to understand all three components, how they interact with each other, and how they interact with Medicare and the Federal Employees Health Benefits program.
The FERS Basic Benefit is calculated as a percentage of the high-three average salary multiplied by the years of creditable service. For most employees, the multiplier is 1% per year of service, or 1.1% per year of service for employees who retire at age 62 or later with at least twenty years of service. A FERS employee with thirty years of service and a high-three average salary of $85,000 who retires at 62 would receive approximately $28,050 per year in FERS pension income.
The FERS pension is inflation-adjusted by a COLA that is slightly less favorable than the Social Security COLA: for inflation up to 2%, the FERS COLA equals the CPI increase; for inflation between 2% and 3%, the FERS COLA is 2%; for inflation above 3%, the FERS COLA is the CPI minus 1%. This means the FERS pension loses slightly more real purchasing power during high-inflation periods than Social Security.
FERS employees who retire before age 62, which many do through the Minimum Retirement Age provisions, receive a temporary supplement that approximates the Social Security benefit they've earned based on their federal service. This supplement bridges the gap between early retirement and age 62 when Social Security eligibility begins, but it is subject to the Social Security earnings test if the retiree works after retirement and earns above the annual exempt amount.
The TSP is a defined contribution retirement savings plan for federal employees and uniformed service members. It offers a limited but well-designed investment menu including index funds tracking the US stock market, international stocks, bonds, government securities, and lifecycle funds. Expense ratios are among the lowest available in any retirement plan.
FERS employees receive automatic agency contributions of 1% of salary and matching contributions up to 4% of salary for a total potential government contribution of 5% of salary. For employees who maximize their own contributions, the TSP is a highly efficient accumulation vehicle. TSP accounts are subject to the same distribution rules as IRAs and 401(k)s, including the 10% early withdrawal penalty before age 59.5, RMD requirements at 73, and the full range of tax planning strategies discussed throughout this paper series.
Service members who entered military service before January 1, 2018 and serve at least twenty years are eligible for the traditional High-3 military retirement system. The retirement pay is calculated as 2.5% of the average of the highest 36 months of base pay, multiplied by the years of service. A service member with twenty years at the E-7 or O-4 level receives approximately 50% of their high-three average base pay, which is paid monthly for life beginning immediately upon retirement regardless of age.
Military retirement pay is generally taxable income at the federal level, though Idaho provides some exemption for military retirement income. COLA adjustments to military retirement pay follow the full CPI, making it slightly more inflation-protective than the FERS pension.
Service members who entered after January 1, 2018, and some who opted into the new system during the opt-in period, participate in the Blended Retirement System. The BRS combines a reduced defined benefit pension, 2.0% per year of service at twenty years versus the legacy system's 2.5%, with a government-funded Thrift Savings Plan account that provides continuation pay at the twelve-year mark and government TSP contributions from the beginning of service.
The BRS is designed to provide some retirement benefit to service members who don't reach the twenty-year mark that the legacy system required, a significant population since the majority of military personnel don't serve for a full twenty years. For those who do serve twenty or more years, the math comparison between the two systems depends primarily on investment returns in the TSP and on the value of the continuation pay.
Veterans who were discharged under conditions other than dishonorable may be eligible for a range of VA benefits that complement but are separate from military retirement pay. VA disability compensation, which is tax-free, is available to veterans with service-connected disabilities rated at various percentages based on the severity of the condition. VA healthcare provides medical care through VA facilities for eligible veterans, with priority based on service-connected conditions, combat service, and income.
The interaction between military retirement pay and VA disability compensation is important to understand. Veterans who receive both military retirement pay and VA disability compensation may be subject to the VA waiver, which historically reduced military retirement pay dollar for dollar for the amount of VA disability compensation received. Concurrent Retirement and Disability Pay allows eligible veterans who are at least 50% disabled to receive both benefits without offset, and Combat-Related Special Compensation provides additional benefits for veterans with combat-related disabilities.
FERS employees participate in Social Security and build Social Security benefits in addition to their FERS pension. Unlike some older federal employees under the Civil Service Retirement System, FERS employees will receive Social Security benefits based on their federal earnings contributions.
Military service members also participate in Social Security and receive Social Security credits for their military service. Veterans who receive VA disability compensation may also be eligible for Social Security disability benefits if their conditions meet SSA's disability standards, though the two programs have different definitions of disability and different benefit calculations.
Federal retirees can maintain Federal Employees Health Benefits coverage into retirement, including after Medicare eligibility begins at 65. Most federal retirees choose to keep FEHB alongside Medicare Parts A and B, with FEHB serving as secondary coverage that fills gaps in Medicare. This coordination can significantly reduce out-of-pocket healthcare costs for federal retirees compared to Medicare alone with a supplemental Medigap policy.
Premium costs for FEHB in retirement are typically lower than comparable individual market coverage because the government continues to pay a portion of the premium for qualifying retirees. Enrolling in Medicare Part B is generally advantageous for federal retirees because FEHB typically waives most cost-sharing when Medicare is primary, producing very low total out-of-pocket costs for the combination.
The TSP offers several withdrawal options for separating employees and retirees. Partial withdrawals, full withdrawals, installment payments, and life annuity purchases are available. The installment payment option allows the TSP to calculate payments based on the IRS life expectancy table, producing RMD-compliant distributions, or based on a fixed dollar amount specified by the participant.
Unlike most employer 401(k) plans, the TSP does not allow in-service withdrawals after separation before age 59.5 without the 10% penalty, with the exception of the age 55 separation rule: TSP participants who separate from federal service in or after the year they turn 55 can withdraw from the TSP without the 10% penalty, even if they're not yet 59.5.
The TSP does not currently offer Roth conversion within the account, unlike IRAs which allow conversion from traditional to Roth. However, TSP participants can roll their TSP balance to an IRA after separation and then execute Roth conversions from the IRA. This rollover and conversion strategy allows federal retirees to access the same Roth conversion planning discussed throughout this white paper series, though it requires moving the funds outside the TSP.
The decision to roll the TSP to an IRA versus leaving funds in the TSP depends on several factors: the TSP's extremely low expense ratios, which often favor staying in the TSP for investment cost efficiency; the IRA's broader investment options and Roth conversion flexibility, which often favor rolling to an IRA for planning flexibility; and specific income needs and distribution strategies that differ by individual situation.
This integrated view ensures the three components are being optimized together rather than in isolation.
This comparison of cost efficiency versus planning flexibility should drive a specific recommendation.
Understanding the below-CPI COLA structure helps in modeling the pension's real value over time.
This question specifically addresses the CRDP and CRSC programs that affect veterans receiving both benefits.
The FEHB-Medicare coordination is a significant cost-of-healthcare consideration for federal retirees.
The retirement planning calculator at plan.johnkoyle.com was built to model exactly the dynamics discussed in this paper. The retirement calculator at plan.johnkoyle.com can model the full federal retirement income picture by entering the FERS pension as a monthly pension income, Social Security at the planned claiming age, and the TSP balance as the pre-tax portfolio. If you have Roth TSP contributions, enter those separately as Roth balance. The calculator then shows how these three income sources interact with your planned spending and models the sustainability of the total plan across 500 Monte Carlo scenarios. For military retirees, enter the military retirement pay as the monthly pension income input alongside any VA disability compensation that is not income-based.
John Koyle, AIF®, is the Co-Founder of Red Cedar Wealth Advisors, headquartered in Pocatello, Idaho. He holds the Accredited Investment Fiduciary (AIF®) designation, awarded by the Center for Fiduciary Studies (Fi360), which signifies completed coursework, a rigorous examination, and ongoing continuing education in fiduciary responsibility and prudent investment practices.
John serves individuals and families in or approaching retirement throughout eastern Idaho, the Pacific Northwest, and across the country via Zoom. Clients work directly with John, not a junior team. Red Cedar Wealth Advisors operates under Osaic Wealth, Inc. (Member FINRA/SIPC) and Osaic Advisory Services, LLC for investment advisory services.
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Retirement planning is a discipline that barely existed a generation ago. For most of modern history, people worked until they physically couldn't and then they died, usually fairly close together. The idea that an individual should spend decades saving, then spend decades drawing down those savings, with a plan that accounts for inflation, taxation, sequence risk, healthcare, longevity, and estate transfer, that's maybe forty years old.
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